How Aerospace, Defense, And Data Centers Fuel A Bright Future

Key Takeaways

• Strategic acquisitions and investments in aerospace, defense, and high-technology PCB manufacturing highlight a focus on high-value markets and potential for margin improvement.
  
• Consolidation of manufacturing operations and investment in automation aim at enhancing operational efficiency and expanding into new commercial markets, indicating future revenue growth.
  
• Operational and strategic risks including qualification delays, labor shortages, supply chain disruptions, high customer concentration, and market share ambitions could significantly impact future revenue and margins.

Catalysts

Manufactures and sells mission systems, radio frequency (RF) components and RF microwave/microelectronic assemblies, and printed circuit boards (PCB) worldwide.

• Demand strength from aerospace and defense (A&D) and data center computing end markets, notably driven by generative AI, indicates rising revenues and suggests a favorable impact on future growth and financial performance.
  
• Strategic transactions and acquisitions in the aerospace and defense sector, with over 50% of A&D revenues now generated from engineered and integrated electronic products, suggest potential for improved net margins due to higher value-added product mix.
  
• Investment in a new highly-automated PCB manufacturing facility in Penang, Malaysia, targeting commercial end markets such as data center computing, networking, and medical, industrial and instrumentation, indicates potential revenue growth from new and existing markets.
  
• The consolidation of manufacturing operations and the closure of 3 small manufacturing facilities to improve operational performance and profitability hint at future enhancements in net margins through reduced operational costs.
  
• The construction of a new high-technology PCB production facility for the aerospace and defense market, aimed at reducing lead times and increasing domestic capacity for high-demand PCBs, suggests future revenue growth driven by national security requirements and higher defense budgets.

Assumptions

• Analysts are assuming TTM Technologies's revenue will grow by 5.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.7% today to 11.6% in 3 years time.
• Analysts expect earnings to reach $318.7 million (and earnings per share of $3.81) by about October 2027, up from $17.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.5x on those 2027 earnings, down from 108.8x today. This future PE is lower than the current PE for the US Electronic industry at 23.7x.
• Analysts expect the number of shares outstanding to decline by 1.85% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.19%, as per the Simply Wall St company report.

Risks

• The qualification delays and extended customer audit times for the new facility in Penang, Malaysia, could result in slower revenue growth than anticipated, impacting both near-term revenues and net margins.
  
• Ongoing labor shortages, especially in high ramp-up scenarios which could affect operational efficiency and lead to increased costs, negatively impacting net margins.
  
• The potential for supply chain disruptions continues, despite improvements, which could lead to inconsistencies in production and supply, impacting revenue and earnings.
  
• High customer concentration in the data center computing segment suggests a risk if demand from these few customers decreases or shifts, potentially impacting revenues significantly.
  
• The transition of some production to the new Penang facility aims to gain market share with standard technology, but if this strategy does not secure the anticipated market share gains, it could affect future revenue growth and earnings.

Valuation

• The analysts have a consensus price target of $24.81 for TTM Technologies based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.7 billion, earnings will come to $318.7 million, and it would be trading on a PE ratio of 9.5x, assuming you use a discount rate of 8.2%.
• Given the current share price of $18.24, the analyst's price target of $24.81 is 26.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.